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FreeMarkets (96.47)

Chinese Manipulating Their Currency

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November 15, 2011 – Comments (24)

You've heard Mitt Romney say it. You've heard Barack Obama say it.  You've probably even heard your neighbor say it.  "The Chinese are cheating by artificially keeping their currency cheap."

It's a great argument.  Cheap currency equals cheap products.  Except it's wrong.

Not wrong as in cheap currency doesn't equal a cheaper product, but wrong that a country can manipulate their currency to their advantage.  We can look at any product category, so I'll pick televisions.  The Chinese want to get into our market and produce TV's.  They weaken their currency and voila, TV's made in China are 10% cheaper than TV's made in Japan or Taiwan.  OK, TV's is a bad product category because we don't make those, let's switch to furniture.  So the Chinese weaken their currency to make sofa's and North Carolina suffers as jobs are lost to cheaper competition from Chinese manufacturers.  The Chinese are not satisfied with 15% of the market, they want 50%, and more U.S. jobs are lost as the Chinese keep putting out lower cost products.  Now the Chinese want to start making serious money on these sofa's, but they can't do that until they dominate the market, so they devalue their currency further and make it so weak that no one will buy an American made sofa.  The Chinese people don't seem to mind that gasoline costs 1,500 yuan/gal, because they just want to sell Americans cheap sofa's.  Those hard working Chinese just want to wake up, work 12 hours, get a spoonful of rice, then send their hard work to lazy Americans watching their Chinese made TV's, sitting on the Chinese made sofa's.

All's good in America until the Chinese say "We tricked you! For 30 years we've cornered your markets, now you have no sofa manufacturing and we're going to RAISE prices sky high!  Ha, ha!!!"

Hayek and Mises are turning in their respective graves.  The Chinese have figured out a way to BEAT a free market system!  The Austrian school of economics looks doomed when the Mexicans ask - "Can we make sofa's and stuff for you?"

There also shocked when North Carolinians begin opening shuttered factories to begin making sofa's again.

The Chinese were clearly not expecting other people in the world are willing to be productive.  "Damn it!" they say "who would have thought our 30 year plan of currency devaluation had a downside."

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So what's the point of this blog, other than to show you can't corner markets using cheap currency (remember the Japanese were going to make all electronics in the 1980's).  The point is, if someone is stupid enough to give you a product for less than fair value, as a Capitalist you should take it.  The joke is on them, not us.  If so many U.S. citizens are out of work, who's going to buy Chinese stuff? If they make it so cheap that we can just print welfare checks to all Americans and the Chinese make everything for us, I say "Thank you China!"  We got rid of slavery because it is wrong, but if they want to be our slaves out of CHOICE, is that morally wrong?  I say not.

24 Comments – Post Your Own

#1) On November 15, 2011 at 11:14 AM, PeteysTired (< 20) wrote:

Would you advocate a strong US currency?

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#2) On November 15, 2011 at 11:17 AM, FreeMarkets (96.47) wrote:

Absolutely.

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#3) On November 15, 2011 at 12:29 PM, rfaramir (29.28) wrote:

Brilliant argument. Here's more:

First, China is only devaluing their currency because they have decided to peg theirs to ours, and we have decided to devalue ours. Therefore WE are devaluing their currency.

Second, Devaluing a currency only hurts those using that currency. The US is hurting Americans who have to use dollars and any foreigners dumb enough to use dollars without being forced. That latter part will end in the not-too-distant future. China is only hurting Chinese who have to use yuan. They are helping their export industries at the expense of everyone else in the country. It's a bad deal for them.

And as you clearly point out, it's a good deal for us!

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#4) On November 15, 2011 at 12:41 PM, SN3165 (< 20) wrote:

Manipulate: To manage or influence skillfully, especially in an unfair manner.

Don'tt we manipulate our economy with the Fed?

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#5) On November 15, 2011 at 12:56 PM, ETFsRule (99.94) wrote:

You mention that the Chinese have devalued their currency over the past 30 years. Can you provide some data showing things like Chinese GDP growth, purchasing power, quality of life, wage growth, etc, over those 30 years? Because that would be the best way to judge whether or not their policy has been a success.

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#6) On November 15, 2011 at 1:16 PM, whereaminow (30.29) wrote:

Can you provide some data showing things like Chinese GDP growth, purchasing power, quality of life, wage growth, etc, over those 30 years? Because that would be the best way to judge whether or not their policy has been a success.

That would show a correlation, if it is there. It wouldn't show causation or to be more specific, a caual link between devalued currency and improvements in those areas.

Likewise, I cannot point to improvements in those areas during times in American history when we had a relatively stronger currency than other nations or when America was fairly strict in following the gold standard, and say that it proves causality.

What we can say is that the market evolves regardless of currency strength or weakness because it is not the only factor at work. We can also say that any policy that benefits one group of people will invariably be detrimental to another group. We do know, and have known for at least 400 years going back to the Scholastics, that currency debasemet rewards exporters and suffers consumers.

David

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#7) On November 15, 2011 at 1:37 PM, BillyTG (29.20) wrote:

Love reading your blogs. Very thought provoking. Keep it up!

+1

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#8) On November 15, 2011 at 2:06 PM, ETFsRule (99.94) wrote:

"We can also say that any policy that benefits one group of people will invariably be detrimental to another group."

This is true for zero-sum games, but clearly not true for economics.

"We do know, and have known for at least 400 years going back to the Scholastics, that currency debasemet rewards exporters and suffers consumers."

Nah, we only have correlations, as you said earlier.

How would you prove that debasement hurts consumers?

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#9) On November 15, 2011 at 2:24 PM, russiangambit (29.30) wrote:

A pot calling a kettle black.

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#10) On November 15, 2011 at 2:44 PM, whereaminow (30.29) wrote:

This is true for zero-sum games, but clearly not true for economics.

It's absolutely true for economics.  That resources are scarce in relation to human wants is an indisputed fact of economic existence.  Therefore, any policy (use of force) which assigns resources to one group must do so at the expense of another group.

Nah, we only have correlations, as you said earlier.

There is a difference between empiricism and logical deduction.  Empiricism does not prove causal links.  Logical deduction can, and is the basis of human reasoning.

How would you prove that debasement hurts consumers?

By using the chain of reasoning I described above.  Resources are scarce. Allocating them through force to benefit one group must deprive resources from another group.

You can disprove this by showing the error in the logical chain.   Perhaps you can show that resources are not scarce in relation to wants.  Or you can show that currency debasement is not a use of force.  Or you can show that it does not allocate resources to one group (in this exporters). 

David

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#11) On November 15, 2011 at 3:02 PM, Turfscape (40.57) wrote:

I enjoyed reading this blog post...right up until here:

"We got rid of slavery because it is wrong, but if they want to be our slaves out of CHOICE, is that morally wrong?  I say not."

In theory, I agree that if someone is willing to sell their goods for too low a price, take advantage, but...

Who's really making that choice? Citizens of China finding anyway to survive within a totalitarian government-controlled society isn't really a choice. So, if by taking advantage of stupid Chinese trade practices we hurt innocent Chinese citizens, are we faultless?

 

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#12) On November 15, 2011 at 3:51 PM, FreeMarkets (96.47) wrote:

@ETFsRule: "Can you provide some data showing things like Chinese GDP growth, purchasing power, quality of life, wage growth, etc, over those 30 years? Because that would be the best way to judge whether or not their policy has been a success."

I won't get into details like David does, but the correlation can not be proven.  For example, when the U.S.A. was growing in leaps and bounds, going from a joke of an economy in 1807 to the #1 economy on Earth by 1900, what if we promoted a weak currency during that time period?  We could have suffered and been the #2 economy on Earth, then anyone assuming a weak currency promotes growth could say "Hey, America went from a joke economy to #2 in less than a century and used a weak currency to do it!"  They wouldn't know the truth.

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#13) On November 15, 2011 at 3:56 PM, FreeMarkets (96.47) wrote:

@Turfscape "So, if by taking advantage of stupid Chinese trade practices we hurt innocent Chinese citizens, are we faultless?"

Moral arguments are toughwhen you don't know the implications of the opposite action.  When I was a boy my Mom used to say to clean my plate because their are millions of Chinese who are starving.  I don't say that to my children today.  OTOH, it's possible the Chinese would be much better off today if they weren't exporting the fruits of their labor via a weak currency policy.

Determining a Chinese workers free will is difficult, but unless I see a gun in their back forcing them into the iPad factory, I'm comfortable assuming they are no more forced to work as I am.

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#14) On November 15, 2011 at 4:04 PM, FleaBagger (28.77) wrote:

Citizens of China finding anyway to survive within a totalitarian government-controlled society isn't really a choice. So, if by taking advantage of stupid Chinese trade practices we hurt innocent Chinese citizens, are we faultless?

This would be true if our buying of Chinese products did actually hurt Chinese consumers, but once they've devalued their currency and made the cheap goods, it does them no good for us to boycott them. In fact, we and they are each other's best allies in withstanding the vicious attack our central bank and theirs are waging on the affordability of goods in both countries. The solution is to end inflation, and the most thorough and permanent way to do that would be to end the Fed and bring back the gold standard (here at least: who knows how to go about something like that in China?). 

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#15) On November 15, 2011 at 6:03 PM, rofgile (99.31) wrote:

FleaBagger,

 What is happening right now: is that a government (China) provides enormous subsidies to an industry that exports.  That industry is artificially stimulated to a higher production capacity than it should have.  That industry then overproduces and begins selling goods below the cost to make the goods (because of the artificial subsidy).  That industry than dumps said goods overseas and drives out real businesses (un-subsidized with fair wages).  Eventually, when all the leaders of manufacturing are gone, prices creep up again and the government can get rid of subsidies.  

---

 Why can't prices go up later?  When you've completely destroyed your major competitors, it will take a long time before a new one can appear in high tech industries.  Further, that industry might need heavy subsidies to survive the initial period (notice how China provides huge subsidies to industries it is trying to develop, green power for example).  Those subsidies might not be there because the other country might have lost the economic war and no longer have the wherewithal.

 You are making an assumption that is often incorrect in modern economic thought.  You are assuming a marketplace where goods are made my independent craftsmen.  In such a system there is fair competition leading to the best prices for consumers and quality of goods.  

 The real world is no where like the ideal world of economic thought.  Goods produced can benefit from scale effects (the larger and industry, the more resistant it is to startup competition).  Goods can require significant research and development (too expensive for a small startup competitor).  Goods can require expensive manufacturing centers (think of Intel here, again too small for startup competitors).

 Because of these factors, once a country completely wipes out competition in a sector, it is possible for them to rule as a monopoly and raise prices.  Any competitors can lack the advantages of size listed above.  Successful competitors can simply be bought out by the Chinese corporate-state union.

 -Rof 

 

(All the factors I listed above for the non-ideality of modern goods apply to the sectors of Autos, Electronics, Green Power, Heavy Equipment - all sectors in which this game is being played right now by China.) 

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#16) On November 15, 2011 at 6:20 PM, whereaminow (30.29) wrote:

rof,

In the real world, has any country every completely wiped out competition in a sector strictly through currency manipulation and then used that position to raise prices? 

That's not a real world scenario.  Not even Japan accomplished this.  Remember when Japan was the next giant that was going to take over the world?  It didn't happen.  They're still recovering from the funny money boom and crash of 1989.  So whatever gain they may have received from their currency tricks in the 70s and 80s, they still had to pay the price.  And they are still paying the price.

In the real world, it cannot happen. This is because among other side effects, intentionally debasing your currency is a cause of the business cycle.  China will crash hard too one day.  And all the gains they made will be given back and more.  That's economics.  And that's the real world.

David

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#17) On November 15, 2011 at 8:55 PM, ETFsRule (99.94) wrote:

"By using the chain of reasoning I described above. Resources are scarce. Allocating them through force to benefit one group must deprive resources from another group."

For one thing, the term "scarce" is very subjective, and there are varying levels of scarcity. So your attempt to use the term in your axioms is deeply flawed (as is usually the case when people try to analyze anything using absolute terms). Here is the definition of the word from dictionary.com:

scarce   /skɛərs/ Show Spelled [skairs] Show IPA adjective, scarc·er, scarc·est, adverb adjective 1. insufficient to satisfy the need or demand; not abundant: Meat and butter were scarce during the war.

Using this definition, it is clearly incorrect to claim that all resources are scarce.

Next, your analogy of taking resources from one group and giving them to another does not apply very well to "any policy". Many gov't policies are much more complicated, no matter how much we might wish to oversimplify these issues.

And, the long term effects of those policies will result in a situation which cannot be accurately described as a zero-sum game.

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#18) On November 15, 2011 at 9:04 PM, PeteysTired (< 20) wrote:

How did you go from David writing:

 That resources are scarce in relation to human wants is an indisputed fact of economic existence. 

to you saying David said:

it is clearly incorrect to claim that all resources are scarce.

Sorry to get in the middle, but this one threw me for a loop.

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#19) On November 15, 2011 at 9:29 PM, ETFsRule (99.94) wrote:

In comment #10 he simply said, "Resources are scarce."

I interpret that as "all resources are scarce", not "some resources are scarce".

Also, David said: "Therefore, any policy (use of force) which assigns resources to one group must do so at the expense of another group."

This of course is not true when you are talking about resources which are abundant.

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#20) On November 15, 2011 at 9:49 PM, whereaminow (30.29) wrote:

I am speaking strictly in economic language and economic usage.  Resources that are abundant are defined as general conditions of human welfare.  Air, for example, is not an economic good but a general condition of human welfare.  We don't say "hey, you're stealing my air." (Although I do consider Snooki to be an Oxygen Thief, but that is another story).  A native American tribe with millions of buffalo in their zip code does not need to assign property rights to them.  They are a general condition of their welfare.  (Future raping by the white man aside).

An economic good is by its very definition a scarce good.  That's why it must be economized.  Hence, the science of economics.  If there is no need to economize anything (air, for example), there is no need for economic science.

David

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#21) On November 15, 2011 at 11:33 PM, rofgile (99.31) wrote:

There is no such thing as economic science.


It is impossible to truly test any economic theory in the real world in a controlled manner.  Therefore, there is nothing scientific about it.  Efforts to make it mathematical have just layered BS on top of other BS.  Economics is merely a bunch of logical statements build upon a particular person's assumptions.  (Such as everyone having equal information about goods or that everyone always seeks the optimum of their own self interest - loads of crap).

 -Rof 

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#22) On November 15, 2011 at 11:55 PM, whereaminow (30.29) wrote:

It is impossible to truly test any economic theory in the real world in a controlled manner.

100% agree.  The scientific method of the hard sciences like physics is not applicable to the study of economics.

Efforts to make it mathematical have just layered BS on top of other BS

100% agree.  

Economics is merely a bunch of logical statements build upon a particular person's assumptions.

One might be inclined to say the same thing about mathematics. Math, itself is based on logical chains of reasoning.   That is a fact.  But it not built on a particular person's assumptions.  If it were, it wouldn't be logical.  Assumptions do not make the core foundation of logic.  So you could say that you believe that economics is based on illogical assumptions chained together.  

Yours is a comment that I really wish I could speak to you more on.  What you and I would most definitely agree upon is the need to go back and examine the epistimological roots of economics and decide what kind of science should it be?

As an expression of endless mathematical gibberish with no fundamental principle, it is a dismal science.  But as a logical chain of reasoning, it can be powerful.  

(Such as everyone having equal information about goods or that everyone always seeks the optimum of their own self interest - loads of crap).

That is a load of crap.  Perfect competition is not a concept invented or supported by the Austrian School.  They think it's crap too.  It was created by economists to line their pockets. I'm not making this up.  Economists developed the perfect competition argument to make money as witnesses in anti-trust litigation.  They would pitch it to companies losing market share and offer their services in the eventual court case.  It was, and still is, very lucrative.  (But don't worry. They blow it all on the stock market and housing bubble anyway.)

David

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#23) On November 16, 2011 at 11:56 AM, rofgile (99.31) wrote:

David,

  You know what would make a good blog series? A set of blogs looking at famous economic "theories" and what the require assumptions were for them to be correct.  These might be like above (perfect information sharing, no scale effects of business, perfect self-interest, etc) or that risk is "gaussian" when it is not (see option pricing).  

 It could be a once a week look at how things people assume to be tested theories are really just a bunch of hot air.  Psychology studies I think also fit this very well.  

 I do think it is best to be humble in the face of the fact that economics is not just transactions, but ecology, politics, biology, and technology as well.  All those other "HUGE" and unpredictable worlds (can we predict the weather?  does weather affect the markets - think about Japan and the hurricane this last year).  How can anyone make claims to "understand" and predict economic results?  

 What I am finding interesting/amusing lately, is all the Republican candidates are now born-again believers in Hayek and von Mises (Perry and Bachmann for example have both claimed to love reading their works).  Gosh, what a load!!!

 -Rof 

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#24) On November 16, 2011 at 12:59 PM, whereaminow (30.29) wrote:

What I am finding interesting/amusing lately, is all the Republican candidates are now born-again believers in Hayek and von Mises (Perry and Bachmann for example have both claimed to love reading their works).  Gosh, what a load!!!

That actually doesn't amuse me at all. It disgusts me.  They are such con artists.  I spend more time discussing liberal politicians and figures right now because they are more interesting.  There is absolutely nothing interesting or deserving of my attention coming from the non-Ron Paul Republican field.  They might as well not even exist as far as I'm concerned.

You know what would make a good blog series? A set of blogs looking at famous economic "theories" and what the require assumptions were for them to be correct.

That is a fantastic idea.  I don't know if I have the skill to do it, but I'll definitely give it a lot of consideration.

David

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